Patricia Roberts-Rose and her husband, Gene, started off setting aside $50 per month for their daughters, Amaya and Aliya, when they were born. “Today, we deposit $100 per month for each child,†says 43-year-old Roberts-Rose, who lives in Catonsville, Maryland. The Roses already have $16,000 saved for 10-year-old Amaya and about $9,000 for 7-year-old Aliya.
The strategic parents are taking half of their daughters’ birthday and holiday money and adding it to their college savings as well. Family members have been chipping in by giving them savings bonds. With both girls in private school, the Roses plan to take the $1,500 a month they currently pay for the girls combined and apply that money toward college costs when the time comes.
“I know we can’t pay for all of their college but we want to contribute because we were the first people in each of our families to go to college–even if we pay for two years and then [our daughters] get student loans,†Roberts-Rose says, noting that she was responsible for her own costs for school. The athletic sisters play lacrosse, softball, basketball, and swim competitively, “So we’re thinking that maybe that will pay off as well in terms of scholarships.†Tuition, fees, books, and supplies could cost around $63,000 to send Amaya to an in-state school such as the University of Maryland for four years when she reaches college age, and about $74,000 for Aliya. Attending an out-of-state school and living on campus could drastically change those amounts.
The Roses’ situation is far from unusual. While it may have once been customary for college students to look to mom and dad to foot most of the bill, parents’ income and savings account for only 30% of college costs today, according to a 2011 study by Sallie Mae. Grants and scholarships account for 33% of the bill, while student loans represent 15%, student income and savings 11%, parent borrowing 7%, and gifts from family and friends account for 4%.
(Continued on next page)
With college costs skyrocketing and many Americans still reeling from the Great Recession, paying for college is like assembling a jigsaw puzzle. Families must determine where all the pieces fit and whether certain schools or degree programs are even worth the hefty price tag. When considering schools with above-average costs, parents and students should think about what income students expect to earn after graduation based on their career plans, advise experts. For instance, should you send your child to a private, out-of-state school that costs more than $150,000 for four years to study communications, knowing that the median wage for a reporter is $36,000 per year, compared with higher-earning majors such as engineering. The average starting salary for an electrical engineer is $60,646.
“The economy has increased families’ sensitivity to the bottom-line cost of college,†says Mark Kantrowitz, author of Secrets to Winning a Scholarship (CreateSpace; $9.95) and publisher of college planning sites FinAid.org and Fastweb.com. “They are also focusing more on the return on investment.†It’s no longer enough to choose a school and then figure out how you’ll pay for it. Today more than ever, families should consider evaluating schools by their net price–the total cost minus scholarships and grants, experts say.
While some parents may also consider slowing their retirement savings to fuel their children’s college education fund, every parent should save at least enough to take advantage of a company match, says Deborah Owens, a financial educator and author of A Purse of Your Own: An Easy Guide to Financial Security (Touchstone; $15). If there’s no match, you need to be saving 10% of your income for retirement. Since the Roses both work in the school system they have pensions, so they are putting away money, $1,000 collectively each month in an IRA, to augment those funds.
“You can’t afford to shortchange your retirement, so let your children know that they will need to explore other ways of funding–from scholarships to loans,†says Owens. If that sounds harsh, consider that parents who forfeit retirement savings for education may hurt their children in the long run since the kids will likely have to pick up the financial slack if the parents can’t support themselves in their golden years, Owens points out.
(Continued on next page)
Making Tough Decisions
Whether a parent chooses to pay for a child’s college education is largely a personal decision. But perhaps the bigger question is what can you really afford to pay? Tuition and fees at private, nonprofit, four-year colleges and universities averaged $28,500 per year in the 2011—2012 school year, reports the College Board. In addition to being on track to have enough money saved for retirement, a three-month emergency fund should also take priority over saving for college, says Ivory Johnson, founder of Delancey Wealth Management L.L.C. in Washington, D.C. “People tie all their money up in retirement and college savings and then there’s a bump in the road and they find themselves drawing money out and incurring expensive tax consequences.†Taking out a home equity loan to pay for tuition should also be avoided, Johnson adds.
Once your basics are covered–living expenses, emergency fund, and retirement–you can start diverting extra money to your child’s education without sacrificing your own financial stability. Instead of aiming to save $100,000 for your child’s college education, it may be easier if you break it down and save a portion of that goal. For example, you may plan to save $25,000, or 25%–enough to pay for one year–and look to scholarships and loans to make up the rest.
Ronda Liggins always knew she’d do whatever it took to make sure her son, Alex Borden, attended college. “I just want to help him beat the odds,†the 53-year-old Philadelphia mother says. Since Liggins can’t afford to pay nearly $20,000 per year for tuition at
Howard University, where Borden is a junior and business finance major, she and Borden have taken a multistrategy approach to paying for college. Borden applied for every scholarship and grant he could find, amassing nearly $20,000 thus far in grants, but mostly from federal and private student loans. Liggins has also chipped in nearly $10,000 in personal savings.Though the single mother would love to fund more of Borden’s education, “I personally don’t know a whole lot of people that have that kind of money,†she says. “You’re trying to pay your current bills and people aren’t getting paid enormous salaries.â€
(Continued on next page)
Of course, the earlier parents start saving, the better. A little goes a long way; $100 per month over 17 years with a 7% return will yield nearly $40,000. Once you determine how much of your child’s education you can afford to pay, here are some strategies to help cover the bill.
Invest in Qualified Tuition Plans
Qualified Tuition Programs, or Section 529 plans, let you save and invest money that’s exempt from federal taxes. There are two types: 1) college savings plans; the performance of the plan’s investments determines the account’s value when it’s time to withdraw the funds, and 2) prepaid tuition plans, which let you lock in tuition at a set rate, so when it’s time to withdraw the funds from the account and college costs have risen, your rate is locked in. Of course, if sponsoring states can no longer afford to pay the tuition costs as promised, parents may get stuck with the bill (see Money, “Should You Prepay College Tuition?†June 2012).
“If you want your child to go to your alma mater and it participates in the Private College 529 Plan, consider that instead,†says Zaneilia Harris, president of Harris and Harris Wealth Management in Upper Marlboro, Maryland. More than 270 schools offer prepaid tuition under the Private College 529 Plan, which includes the HBCUs Spelman College and Clark Atlanta University.
Each state offers its own 529 plan, and many allow residents from other states to participate. Compare fees when choosing a plan. “Ideally you want the plan that you are investing in to have fees under 1%,†says Kantrowitz. Some states also offer other incentives, such as state income tax deductions or tax credits. You can choose between a direct-sold 529 plan in which you select your investments, and an adviser-sold plan, which offers professional guidance. With an adviser plan, you’re paying an adviser on top of the fees that the 529 is charging you.
(Continued on next page)
Choose a plan that offers flexible mutual fund investment options that will enable you to broadly diversify across asset classes, regions, and sectors. For plan comparisons visit
www.collegesavings.org.
Determine Financial Aid
Parents must get savvy about the financial aid process, says Kalman A. Chany, author of Paying for College Without Going Broke (Princeton Review; $20).
To qualify for financial aid, families must fill out the Free Application for Federal Student Aid, or FAFSA. A formula is applied that looks at the income and assets of the parents and the student to determine the Expected Family Contribution (see “How to Negotiate a Better Financial Aid Package,†September 2011).
Since October 29, 2011, nearly every college and university is required by law to have a net price calculator posted online that gives an estimate of how much a student would have to pay after financial aid is awarded. This calculator uses academic, family, and financial information to estimate the grants, scholarships, and other financial aid that is likely to be available. Your “net price†is the difference between that amount and the current year’s cost of attendance at that school. There are some flaws, however, says Kantrowitz. Some calculators collect less information and provide a less accurate financial aid estimate than others. For that reason, it’s hard to compare college costs between two schools strictly using the calculators, but “they will tell you whether the colleges are inside or outside the ballpark of affordability,†he says.
(Continued on next page)
Student assets are generally assessed more heavily than parents’ assets in the financial aid formula, so it’s better to have college savings plans in the parent’s name than the student’s name, Chany says. Some people elect to open a 529 plan in a grandparent’s name so the income won’t be reported as an asset on the FAFSA, but a distribution from the plan will count as untaxed income to the beneficiary, which will negatively impact the student’s aid eligibility the following year, Kantrowitz warns. Be sure to file your FAFSA every year even if you didn’t qualify for aid the year before. “There are enough changes from one year to the next that you might qualify.â€
Search for Outside Scholarships
Students can play a big part in the funding of their education by applying for scholarships that award money for anything from academics to community service. To increase the odds of winning scholarships, start early and apply even after entering college since some are designated for current students. There are even college scholarships for students in elementary and middle school, says Kantrowitz. Search sites such as FinAid.org, Fastweb.com, and Scholarships.com. When using free scholarship matching services answer all questions so you will be matched with more opportunities. Apply for every scholarship for which your child is eligible, including small ones since they can help win bigger ones.
Look for scholarships that apply to minority students, including the Gates Millennium Scholars Program, National Action Council for Minorities in Engineering scholarships, and the Ron Brown Scholar Program, whose website also lists additional scholarship resources. Visit USScholarshipGuide.org, ED.gov (U.S. Department of Education), and CollegeScholarships.org.
(Continued on next page)
Round it Out with Loans
Loans are part of the equation for most families. Federal student loans such as the Stafford and Perkins loans have interest rates around 6.8%Â (unsubsidized) and 5% (at press time), respectively, and repayment can be deferred while the student is in school. The Parent Loan for Undergraduate Students program (PLUS) has a higher rate (7.9% at press time) and can’t be deferred while the child is in school. Private student loans can also be taken out, with interest rates based on the credit score of the child or co-signing parent.
According to the Project on Student Debt’s study, Student Debt and the Class of 2010, the average student loan debt for a 2010 graduate was $25,250. That, coupled with the fact that 50% of graduates under the age of 25 are either unemployed or underemployed, forces people to think more strategically about debt if they don’t want it to compromise their financial future. A good rule of thumb is to avoid borrowing more than your expected annual starting salary, Kantrowitz says. Also consider the job prospects for your desired field before taking on a lot of student loan debt.
For instance, if you are considering a public sector stint or government job, it pays to know that the Federal Student Loans Repayment Program is used by federal agencies such as the Justice Department to recruit and retain high-value employees by helping to repay their student loans. Similarly, some or all of your college debt will be forgiven if you work in public service. For example, the College Cost Reduction and Access Act of 2007 created a public service loan forgiveness program that eliminates certain unpaid college debts after 10 years of working full time in the public sector, including such positions as nurses and early childhood teachers. Visit www.studentaid.ed.gov and www.finaid.org to learn more.
Once you’ve explored savings, scholarships, and loans, you can apply personal strategies to lower college costs even more. For instance, have your child stay in state. The average cost of in-state tuition and fees at a public four-year institution is $8,244 compared to $20,770 out-of-state. Or having your child attend a community college for two years and then transferring to a four-year university can cut your expenses in half, says Johnson. The average cost for one year at public two-year-colleges is $2,963.
The earlier families sit down to assemble the college savings puzzle, the more options they have to ensure that students receive a quality and affordable education, say financial experts. The power is in the planning.Â